Djibouti: Maintaining a financial gold standard


Djibouti: Maintaining a financial gold standard

Djibouti’s strong financial institutions and stable monetary system have earned it a solid reputation and the country has ambitions to become a regional or even continental finance hub, as Ahmed Osman, Governor of the Central Bank of Djibouti tells Dounia Ben Mohamed.

The Central Bank of Djibouti is the country’s monetary authority responsible for managing the country’s currency, the Djiboutian franc, as well as the financial landscape. Ahmed Osman was appointed to his position in 2013 and oversees one of the most solid financial regimes in Africa. 

What shape is the financial sector in?

The financial sector in Djibouti is undergoing an unprecedented expansion following the major reforms we initiated in the early 2000s to transform and modernise our financial markets.

Starting with only two conventional banks and five financial auxiliaries in 2006, the sector currently has 37 financial institutions, including all legal forms and types of activity, for a population of less than one million people.

The result is that access to banking services, around 5% in early 2000 and 7% in 2006, is now in excess of 25%. And interest rates continue to fall thanks to the competition. 

Today, there is a comprehensive range of financial products and services available and we like to think they can satisfy almost any form of demand in the local market and the sub-region beyond.

The ambition we cherish by implementing these reforms is to make our city into a regional financial hub; and why not continental or even international in the longer term? In terms of this objective, our country has a certain number of competitive advantages to help it get there.

Among others, we have: political stability, our geostrategic position, a high performance macroeconomic environment, a particularly friendly overall business climate, the most efficient communications infrastructure in Africa, a liberal economic system that guarantees the total freedom of movement of capital with no exchange controls, a supportive tax regime with exclusions for financial products, productive investments, etc.

In addition, Djibouti has a unique monetary system that benefits from the exceptional stability and longevity that form the foundation of our financial system.

This monetary system, which was set up in 1949, works on the Currency Board principle, with a national currency, the Djibouti franc, pegged to the US dollar through a fixed exchange rate.

To maintain the rate, the totality of the paper money issued by the Central Bank has a proportionate coverage in foreign exchange. With foreign exchange cover well in excess of 100%, the free and full convertibility of Djibouti’s national currency is always guaranteed. 

The credibility and stability of this monetary system is also excellent for the domestic economy. It consolidates both external stability and controls domestic inflation, which remains structurally low (under 3% over a long period).

The prohibition on the monetary financing of any public deficit dictated by the system imposes a certain budgetary discipline on the government.

However, preserving the system over the long-term requires rigorous management of reserve assets and effective banking supervision.

So, the many advantages offered by Djibouti have long contributed to the solid reputation of its financial institutions, to whom the operators in the sub-region have entrusted their transactions, thus prefiguring the status of sub-regional financial platform, which we plan to expand on a more regional and continental scale.

What makes Djibouti increasingly attractive to investors?

This well-regulated environment attracts investors and in particular, the economic players within the sub-region who can depend on our port and financial infrastructure to conduct their business in the region. 

The reforms we undertook in the 2000s made it possible to open up the banking sector in Djibouti to promoters from many backgrounds, including from within the region. Since then, banking groups with diverse origins (Africa, Asia, Europe, etc.) have set up shop on our soil.

But for us, these banks have no nationality, they are banks under Djibouti law. 

What is your view about the national debt?

Some countries take on debt because they are facing budgetary difficulties and need to borrow to consume or to finance the shortfall between income and expenditure. This is not the case for Djibouti, which issues debt to be able to invest in building the country, infrastructure (new ports, roads, railways, etc.).

These are thus investments in the country’s development, to stimulate the economy and create added value, while generating enough return on investment to cover the depreciation.

Concerning indebtedness, the state must behave like a business. It must ensure that the return on investment of projects is economically and socially beneficial. To this end, we supply the state with logistical help and advice in putting together project financing.

The reforms undertaken by the Central Bank have contributed to the current expansion of the banking sector.

We believe that with the development of mobile banking, the rate of access to banking services will very quickly reach a significant level in view of the configuration of Djibouti, where a relatively small population is concentrated in an urban area. 

What is the situation in Djibouti in terms of financing SMEs?

It is worth noting that SMEs in Djibouti are mostly of a commercial nature, with a small proportion of processing activities and so, it’s true, [they] have often found themselves short of financing in the past.

At the same time, the banking sector in Djibouti is very liquid and has enough resources to provide the financing the SMEs need. In addition, there is a public body known as the Economic Development Fund which is there to finance SMEs.

The government, working with the business community, has focused on strengthening SMEs in order to gradually move them out of the informal sector. The Djibouti Chamber of Commerce has created a department (the ‘approved management centre’) to support and equip SMEs in terms of administration, accounting and the development of business plans, etc., to make it possible for them to access funds from the financial institutions. 

The government has injected a lot of investment (lines of credit, subsidies for capital and operating expenses) to promote the development of microfinance in response to the financing needs of Very Small Businesses in the informal sector and activities that generate income for the most vulnerable layers of the population with no access to banking services.. 

To conclude, how do you see the financial future for Djibouti?

Djibouti is already a solid financial platform. We are seeing non-residents starting to take up a large proportion of the monetary aggregates. And we are also succeeding in keeping the old banks even as we attract new ones, along with the emergence of new products such as Islamic finance. This is also part of our plan: we have introduced the legislation necessary for the development of Islamic finance. And the investors have responded with the result that the sector has achieved a 20% market share in less than 10 years. 

We are also starting to attract major banks, such as the Bank of China, which sees the benefits of setting up in Djibouti, where it will be able to finance projects for the region.

In conclusion, in this area as in others, we are ahead of the game and ready to face the competition. I remain confident that we will achieve our goal of being a regional logistics and financial hub. 

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